Annual
Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934

For the
Fiscal Year ended December 31, 2008

Commission
File Number 0-13839

CAS
MEDICAL SYSTEMS, INC.

(Exact
name of registrant as specified in its charter)

Delaware

06-1123096

(State
or other jurisdiction of

incorporation
or organization)

(I.R.S.
Employer Identification No.)

44 East Industrial Road,
Branford, Connecticut 06405

(Address
of principal executive offices, including zip code)

(203)
488-6056

(Registrant’s telephone
number, including area code)

Securities
registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which
Registered

Common
Stock, $.004 par value

The
NASDAQ Global Market

Securities
registered pursuant to Section 12(g) of the
Act: None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No
x

Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No
x

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes
x No
o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):

Large accelerated
filer o

Accelerated
filer o

Non-accelerated
filer o

(Do not check if a smaller
reporting company)

Smaller
reporting company x

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes
o No
x

As of
June 30, 2008, which is the last business day of the registrant’s most recently
completed second fiscal quarter, the aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant was $26,674,000 based on
the closing price as reported on the NASDAQ Global Market. This
calculation does not reflect a determination that persons are affiliates for any
other purpose.

As of
March 31, 2009, there were 11,356,662 shares of common stock
outstanding.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions
of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be
held on June 10, 2009 are incorporated by reference in Part III of this
Report. Except as expressly incorporated by reference, the
Registrant’s Proxy Statement shall not be deemed to be part of this Form
10-K.

This
report may contain information that includes or is based on forward-looking
statements within the meaning of the federal securities laws that are subject to
risks and uncertainties. These statements may be identified by the
use of words such as “anticipates,” “expects,”
“estimates,” “projects,” “intends” and “believes” and variations thereof and
other terms of similar meaning. Factors that could cause the
Company’s actual results and financial condition to differ from the Company’s
expectations include, but are not limited to: potential liquidity constraints;
price and product competition; rapid technological changes; dependence on new
product development; failure to introduce new products effectively or on a
timely basis; the mix of products sold; supply and prices of raw materials and
products; customer demand for the Company’s products; regulatory actions;
changes in reimbursement levels from third-party payors; product liability or
other litigation claims; changes in economic conditions that adversely affect
the level of demand for the Company’s products; changes in foreign exchange
markets; changes in financial markets; changes in the competitive environment;
and other risks described in Item 1A of this filing. While the
Company believes that the assumptions underlying such forward-looking statements
are reasonable, there can be no assurance that future events or developments
will not cause such statements to be inaccurate. All forward-looking
statements contained in this report are qualified in their entirety by this
cautionary statement.

Unless
the context indicates otherwise, as used in this report, the terms “CAS,”
“CASMED,” the “Company,” “we,” “us” and “our” refer to CAS Medical Systems,
Inc.

Our
products have well established brand recognition in the markets we
serve. Our most recent addition is the FORE-SIGHT cerebral
oximeter. This device is designed to measure absolute levels of brain
oxygenation in the most critically ill patients, including pediatric and
neonatal intensive care patients and adults undergoing cardiac bypass
surgery. Use of the FORE-SIGHT system enables the clinician to
significantly reduce potentially serious negative outcomes in these settings by
providing real-time non-invasive measurement of the level of oxygen in the
brain, allowing the clinician to intervene before brain damage
occurs. The brain is the organ least tolerant of oxygen deprivation.
Without sufficient oxygen, brain damage may occur within minutes, which can
result in stroke, paralysis, other disabilities or death. Reliable measurement
of absolute levels of brain oxygen is therefore important to clinicians,
especially in critical care situations where there is a high risk of the brain
getting less oxygen than it needs.

Description of Products and
Services

The
Company has several categories of products and services. The combined
categories represent one reportable business unit. Categories of products and
services are as follows:

Bedside
monitoring– includes sales of the Company’s vital signs monitors and
accessories incorporating various combinations of measurement parameters
for both human and veterinary use. Parameters found in these
monitors include pulse oximetry, electro-cardiography, temperature,
non-invasive blood pressure, and capnography. Also included in
the bedside monitoring category are products developed and manufactured by
Analogic Corporation, or otherwise supplied through Analogic, including
vital signs monitors utilizing parameters as described above and
additional monitors which measure non-invasive cardiac output and
hemodynamic status, and maternal/fetal monitors. These vital
signs monitors allow for connectivity to a central
station. Additionally, the Company’s cardio-respiratory
monitors and accessories used to monitor apnea in home-based and hospital
settings are also included in this
category.

Supplies
and service – includes sales of blood pressure cuffs and rapid infusor
cuffs, neonatal intensive care supplies including electrodes and skin
temperature probes, and service repair
revenues.

Critical
Care Monitoring

The
FORE-SIGHT Cerebral Oximeter non-invasively and continuously measures absolute
brain tissue oxygen levels, enabling clinicians to identify and quickly react to
instances of lowered brain oxygen levels before the situation becomes
critical. With one or two single-use disposable sensors placed on the
patient’s forehead, FORE-SIGHT utilizes the Company’s LASER-SIGHT Optical
Technology to project near infrared light into the brain to provide an absolute
measurement indicating cerebral tissue oxygen saturation.

Unlike
readings obtained from a trend-only monitor, absolute cerebral tissue oxygen
saturation readings have stand-alone clinical significance because individual
measurements have a direct correlation to the standard invasive measurements
with which clinicians are familiar. Several studies have been
published showing that the use of cerebral oximetry during cardiac surgery can
significantly reduce adverse clinical outcomes due to neurological
complications, including permanent stroke. Other published studies have shown
decreased length of stay and decreased post operative ventilator time when
cerebral oximetry is used. Use of cerebral oximetry can lead to improved patient
outcomes and significant cost savings to hospitals.

In
February 2008, the Company received 510(k) clearance expanding the indications
for use of its FORE-SIGHT infant sensor to include the neonatal patient
population above 2,500 grams of weight. Measuring cerebral oxygen saturation is
significant for a variety of neonatal patients, including those born with
congenital heart defects that affect the ability of the heart to supply
oxygenated blood to the brain. Approximately 550 hospitals in the U.S. contain
Neonatal Intensive Care Units (“NICU”) with 13,000 high acuity Level 3 beds.
Approximately four million births occur in the U.S. each year of which
approximately 4% are babies with a birth defect and about 12% are preterm births
(defined as less than 37 weeks from gestation).

The
Company began marketing the neonatal/infant FORE-SIGHT oximeter sensor in the
second half of 2008, primarily targeting the hospital market for use in the
Neonatal/Infant cardiovascular operating room, the Cardiac Intensive Care Unit
and the NICU. The FORE-SIGHT product accurately detects low cerebral oxygen
saturation events during critical periods, thereby allowing clinicians to
intervene and reverse potentially life threatening events before they become
critical. In neonates in particular, the issue is compounded by the
lack of physiological reserve mechanisms that the body can use to regulate blood
flow and protect the brain from low oxygen levels. CASMED is the only company in
the marketplace to have received FDA regulatory clearance with labeling for use
of absolute cerebral oximetry in neonatal and infant populations.

Additionally,
in March 2009 we received 510(k) clearance from the Food and Drug Administration
(“FDA”) for a medium size FORE-SIGHT sensor to complement the large and small
sensor offerings. We expect to begin marketing this sensor, targeted at the
pediatric patient population, during mid-2009, thus completing our cerebral
oximeter sensor offerings. In addition, during 2009 we expect to pursue
additional FDA 510(k) clearance for other expanded uses including additional
non-cerebral sensors and features.

We are
sponsoring and evaluating sponsorship of clinical trials which may allow us to
more actively target the sale of the FORE-SIGHT System for use in high risk
neonatal and pediatric patient populations.

In
January 2009, a review paper published in the Journal of
Perinatology and authored by JC Fenik and K. Rais-Bahrami titled “Neonatal cerebral oximetry
monitoring during ECMO cannulation”, detailed the benefits of absolute
cerebral oximetry in neonatal patients undergoing extracorporeal membrane
oxygenation (ECMO) therapy, including its ability to reliably measure brain
oxygen levels during CPR when conventional technologies such as pulse oximetry
have failed.

Page 5

Additional
studies targeted at the pediatric and neonatal populations are underway
including the use of monitoring absolute cerebral oximetry on pediatric patients
undergoing cardiac catheterization, neonatal pain management, peri-operative
monitoring of congenital heart patients, as well as auto-regulation
response.

The
Company believes that there is also an opportunity for establishment of
FORE-SIGHT Absolute Cerebral Oximetry as a standard of care in all cardiac
surgical procedures, where nearly 700,000 procedures are performed annually in
the U.S. Several clinical studies have already been published
demonstrating the importance and effectiveness of monitoring changes in cerebral
oximetry during cardiac surgery. Examples of these published studies
include –

·

In
September 2004 a retrospective, blinded intervention 2,279-patient
published as Scott Goldman, M.D., et al., “Optimizing Intraoperative
Cerebral Oxygen Delivery Using Noninvasive Cerebral Oximetry Decreases the
Incidence of Stroke for Cardiac Surgical Patients”, in the Heart Surgery
Forum #2004-1062 showed a significant reduction in permanent stroke
when information from cerebral oximetry was used to help manage regional
brain blood oxygen saturation in cardiac surgery
patients.

·

In
January 2007, a 200-patient study, published as John M. Murkin, M.D., et
al., “Monitoring Brain
Oxygen Saturation During Coronary Bypass Surgery: A Randomized,
Prospective Study”, in Anesthesia and
Analgesia showed a statistically significant reduction in
incidences of major organ dysfunction when cerebral oximetry was used to
provide information to help manage regional brain blood oxygen saturation
in coronary artery bypass surgery
patients.

·

In
March 2008, a review paper published as Gregory W. Fischer, M.D.,
Co-Director of Cardiac Anesthesia at Mount Sinai Medical Center in New
York “Recent Advances in
the Application of Cerebral Oximetry in Adult Cardiovascular
Surgery”, in Seminars in
Cardiothoracic and Vascular Anesthesia detailed the benefits of
absolute cerebral oximetry in patients undergoing Deep Hypothermic Cardiac
Arrest (“DHCA”) aortic arch
surgery.

·

In
June 2008, a paper published as Thomas Hemmerling M.D., et al., “Cerebral desaturation during
single lung ventilation correlates with postoperative morbidity”,
in Canadian
Journal of Anesthesia Supplement detailed the benefits of
monitoring absolute cerebral oximetry in patients undergoing single lung
ventilation (SLV) and showed a positive correlation between the decrease
of SctO2 during SLV and postoperative non-pulmonary organ
failure.

Additional
cardiac and thoracic surgery studies are underway in the U.S and Europe with
results from these studies expected to be published during 2009.

The
Company is actively supporting several on-going clinical studies throughout
North America and Europe, specifically designed to expand the available market
by highlighting the benefits of absolute cerebral oximetry. These
studies include –

·

An
NIH-funded major multi-center study researching cognitive decline and
delirium in elderly patients undergoing major general
surgery. The study, which began in 2008, involves seven key
medical institutions throughout the U.S. Approximately five
million elderly patients have surgery in the U.S. each
year. These surgeries are generally considered high risk due to
a variety of factors. The Company believes that monitoring
cerebral oximetry using FORE-SIGHT can also significantly benefit this
population of patients.

·

Two
studies to show the benefit of absolute cerebral oximetry monitoring
during shoulder surgery in the sitting or “beach chair”
position. In the summer of 2007, a newsletter of the Anesthesia Patient
Safety Foundation (“APSF”) described two patients with no
significant risk factors or evidence of cerebral vascular disease who both
developed permanent neurological deficits likely from global cerebral
hypo-perfusion while undergoing shoulder surgery in the beach chair
position. The beach chair position can cause significant
hemodynamic changes, the response to which are further blocked by the
combination of inhalation/intravenous drugs. The current
standard of care for these patients is to measure blood pressure using a
cuff laced on the opposite arm or either leg that automatically identifies
oscillometric blood pressure readings. The Company believes
that monitoring cerebral oximetry using FORE-SIGHT can significantly
benefit patients during these
procedures.

Page 6

The
Company continues to evaluate sponsoring other clinical studies that expand the
use of FORE-SIGHT Absolute Cerebral Oximetry into other patient populations and
applications.

During
our fiscal year ended December 31, 2008, net sales from disposable sensors
comprised approximately 4% of our overall net sales. As of December 31,
2008, 151 FORE-SIGHT monitors were installed in approximately 70 hospitals
worldwide.

Bedside
Monitoring

The
Company offers a full line of non-invasive vital signs monitoring products for a
variety of general care settings in hospitals such as outpatient medical
surgical units, recovery, procedure labs, physician offices and emergency
response settings. The monitors are small, lightweight, portable and easy to use
with central station capabilities.

The
Company manufactures two platforms of vital signs monitors incorporating various
combinations of industry-leading measurement parameters. The product
lines include options for measurement of non-invasive blood pressure using the
Company’s proprietary MAXNIBP technology, pulse oximetry,
electro-cardiography, temperature, and capnography. CASMED monitors
are ideal for a range of clinical settings (both human and veterinary) including
emergency medical service, medical/surgical units, out-patient care, and
procedural sedation. During 2003, the Company was awarded a multi-year,
sole-source purchasing agreement by the U.S. Department of Veterans Affairs
(“VA”) for its vital signs monitors. This agreement expired during 2008. The VA
has since issued a blanket purchase agreement in effect through June 2009 naming
CASMED as an approved vendor. The Company is currently seeking an extension of
the blanket purchase agreement. Management does not believe that its business
with the VA will be materially affected should it not be successful in receiving
such extension.

Also
included in the bedside monitoring category are products developed and
manufactured by Analogic Corporation, or otherwise supplied through Analogic,
including vital signs monitors utilizing parameters as described above and
additional monitors which measure non-invasive cardiac output and hemodynamic
status, and maternal/fetal monitors. These vital signs monitors allow
for connectivity to a central station.

The
Company also manufactures a line of cardio-respiratory monitors used to monitor
apnea in home-based and hospital settings. This niche market is
primarily a replacement market. Revenues in this market have been
steadily declining over the past several years. Revenues generated from this
line were less than 5% of overall revenues in 2008. The Company plans to exit
this market during 2009.

Blood
Pressure Measurement Technology

The
Company has developed a proprietary non-invasive blood pressure measurement
technology, MAXNIBP. The Company
believes this technology is more accurate, reliable, and able to produce a
measurement result faster than its competitors. These advantages
strengthen the Company’s competitive position, especially in clinical situations
where measurements can be difficult. The Company has entered into OEM
agreements to supply its MAXNIBP technology to various
companies throughout the world. This technology is used in larger
monitoring systems where non-invasive blood pressure is but one measurement
parameter. The Company’s OEM agreements are typically multi-year
arrangements.

Supplies
and Service

The
Company offers a complete line of disposable and reusable blood pressure cuffs
that can be used with any manufacturer’s monitoring equipment. The
product line includes cuffs and pressure infusors manufactured by Statcorp, Inc.
which was purchased by CASMED in 2005. The blood pressure cuffs,
including UltraCheck and Tuff-Cuff Reusable Cuffs, and SoftCheck and Safe-Cuff
Disposable Cuffs, can be used on patients from neonate through adult, as well as
on veterinary patients, and complement the Company’s MAXNIBP blood pressure measurement
technology. The Company’s Unifusor line of infusor cuffs are used to
rapidly infuse intra-venous fluids into a patient. The Company has
various private-label versions of both the blood pressure and infusor cuffs
available for OEM partners.

Page 7

The
Company offers a line of specialty neonatal supplies - high quality products
designed specifically to meet the unique needs of neonatal intensive care. The
varied product line includes Klear-Trace ECG
Electrodes, NeoGuard skin temperature probes and adhesive reflectors, and
SoftCheck neonatal blood pressure cuffs.

Sales and
Marketing

The
Company markets its products globally, through hospital, alternate site,
homecare, veterinary and emergency medical distribution channels. A number of
different sales channels are utilized to maximize opportunities with the various
product lines we offer.

In 2008,
the Company hired a new Vice-President of Sales and Marketing and achieved
several important milestones including establishing a full sales, marketing and
clinical team to support future efforts in the markets for its FORE-SIGHT
cerebral oximetry products.

The
Company’s critical care FORE-SIGHT cerebral oximeters are sold via a direct
sales force and key manufacturers representatives groups within the U.S. and via
distribution partners outside the U.S. In the fourth quarter of 2008 we began
the hiring of a direct sales force which was supplemented by an existing base of
manufacturer representative groups. As of December 31, 2008, the Company
employed a team of 12 sales and clinical support specialist staff dedicated to
the FORE-SIGHT product line in the U.S. market. We expect to increase the size
of our U.S. direct sales team as the market opportunity expands. Outside the
United States, the Company has one sales manager located in Europe focused on
FORE-SIGHT sales, selling to select markets via distribution
partners.

The
Company’s bedside monitoring products and consumable cuff products are sold via
a direct sales force within the U.S., supplemented by a small group of key
distribution partners, and via distribution partners outside the U.S. Within the
U.S., we have six full-time field sales personnel focused primarily on sales to
the Veterans Affairs hospitals for our full line of vital signs monitors.
International sales are conducted through exclusive distributors in the
European, African, Middle Eastern, Pacific Rim and Latin American regions and
Canada, working together with regional sales consultants and one employee
located outside of the United States.

The
Company sells its non-invasive blood pressure technology, in the form of
sub-assemblies to be joined to multi-parameter monitors, on a direct basis to
various firms operating in both the domestic and international markets. The
Company is in the process of pursuing additional OEM agreements.

Sales of
the Company’s supplies and services are primarily sold via key distribution
partners in both the U.S. and International markets.

Financial
Information Relating to Sales

Year
Ended December 31

2008

2007

2006

Domestic
Sales

$

30,031,921

$

29,601,305

$

27,518,584

International
Sales

10,617,136

8,631,100

7,683,427

$

40,649,057

$

38,232,405

$

35,202,011

Competition

The
Company competes in the medical equipment market where there are many suppliers
with greater financial and personnel resources that sell a broad line of both
commodity products and monitoring equipment and have a dedicated selling
capability. The Company’s products primarily serve various areas of
the hospital market.

For our
critical care monitoring products, we believe there are currently only two other
companies with FDA 510(k) clearance to sell a cerebral oximeter in the U.S. We
believe that in the future the market for cerebral oximetry may
become highly competitive. We are
aware that several companies and individuals are engaged in the research
and

Page 8

development
of non-invasive cerebral oximeters, and we believe that there are several other
potential entrants into the market. Additionally there are other companies that
have FDA clearance to market somatic or tissue oximeters in the United States.
Competition might cause our sales cycle to lengthen to the extent that customers
take longer to make purchasing decisions. Competition might also reduce our
gross margins and market share and prevent us from achieving further market
penetration. Competitors might be more successful than we are in obtaining FDA
clearance with broader claims in their labeling or more successful than we are
in manufacturing and marketing their products and may be able to take advantage
of the significant time and effort we have invested to gain medical acceptance
of cerebral oximetry.

For our
line of bedside monitoring products and supplies, we are in a highly competitive
global market with numerous U.S. and international based medical equipment
companies.

We also
compete with numerous medical equipment companies and medical device integration
companies for the portions of hospital budgets allocated to capital equipment.
Some of these potential competitors have well-established reputations, customer
relationships and extensive marketing, distribution and service networks. Some
of them have substantially longer histories in the medical products industry,
larger product lines and greater financial, technical, manufacturing, research
and development and management resources than we do. Many of these potential
competitors have long-term product supply relationships with our potential
customers. These potential competitors might be able to use their resources,
reputations and ability to leverage existing customer relationships to give them
a competitive advantage over us, including in securing dollars from hospital
capital equipment budgets to purchase their products. They might also succeed in
developing products that are at least as reliable and effective as our products,
perform additional measurements, are less costly than our products or provide
alternatives to our products. Competitors might be more successful than we are
in manufacturing and marketing their products and may be able to take advantage
of the significant time and effort we have invested in developing our
markets.

The
Company’s products maintain a high, professional standard of accuracy and
quality in demanding environments such as those encountered in hospital and
transport situations. We believe that our reputation for producing innovative,
accurate, reliable, products that are user-friendly, manufactured in the U.S.,
and contain best-in-class technology are key factors in our ability to
successfully compete with larger organizations in the medical equipment market.
With respect to all of its products, the Company competes on the basis of price,
features, product quality and promptness of delivery and overall quality of
customer service.

Research and
Development

During
2008, 2007 and 2006, the Company incurred expenses of approximately $2,610,000,
$2,733,000, and $2,782,000 respectively, on activities related to the research
and development of new products, and improvement of existing products. These
amounts are before consideration of reimbursements received from the National
Institutes of Health (“NIH”) further explained under Grant Awards below.
Net research and development (“R&D”) expenses after reimbursements from the
NIH approximated $2,028,000 for 2008, $2,254,000 for 2007, and $2,762,000 for
2006. Reimbursements from the NIH were approximately $582,000
for 2008, $479,000 for 2007, and $20,000 for 2006. Funding provided to the
Company is recorded as a reduction in R&D expenses.

The
majority of the Company’s 2008 development efforts were directed toward
furthering the design and development of its patented LASER-SIGHT Near-Infrared
Spectroscopy (“NIRS”) technology used in the FORE-SIGHT Cerebral Oximeter. Other
development efforts included enhancements to the Company’s Vital Signs Monitors
as well as design improvements to certain of the Company’s OEM non-invasive
blood pressure modules.

As of
December 31, 2008, the Company employed a staff of 16 engineers and scientists
focused on internal R&D activities outlined above. For 2009, we expect an
increase in our research, development and engineering expenses primarily as a
result of costs associated with development of additional FORE-SIGHT sensors,
cost reduction programs, further enhancements to the cerebral oximeter and
continued clinical research efforts to continue to expand the market
opportunities for the Company’s cerebral oximetry products, as well as continued
advancement the Company’s proprietary OEM non-invasive blood pressure
technology.

Page 9

Grant
Awards

On
September 17, 2007, the Company was awarded a three year grant totaling $2.8
million by the National Institute of Neurological Disorders (“NINDS”) and Stroke
of the NIH under its Small Business Innovative Research Program. The grant was
awarded primarily to support advanced clinical outcome studies that focus
onthe Company’s
proprietary LASER-SIGHT technology incorporated into the FORE-SIGHT cerebral
oximeter. Further clinical studies funded by this grant will be used to expand
the clinical applications for FORE-SIGHT outside of the initial target market of
high risk cardio-vascular surgery. As of December 31, 2008, a maximum of
approximately $1.7 million remained under the 2007 grant award.

The
Company has, in prior years, been awarded various grants by the NINDS under its
Small Business Innovative Research Program. Grants under this program are being
used to support the Company’s LASER-SIGHT NIRS development. In accordance with
the terms of these grants, the Company is reimbursed for certain qualifying
expenditures. Such grant awards provide substantial support for the Company’s
clinical efforts currently being undertaken at multiple adult and neonatal
sites.

Trademarks, Patents and
Copyrights

Certificates
of Registration have been issued to the Company by the United States Department
of Commerce Patent and Trademark Office for the following
marks: CASâ,
CAS Express®,
CASMED®, For
Every Life and Breath Situation®, For
What’s Vital®,
FORE-SIGHT®,
Klear-Traceâ,
LASER-SIGHT®,
Limboardâ,
MAXNIBPâ,
NeoGuardâ,
OscilloMateâ,
Pedisphygâ,
Premie Nestieâ,
Safe-Cuff®,
SoftCheck®,
SWANK®,
Tuff-Cuffâ,
UltraCheck®,
Unifusor®, Woods
Pump®, the
heart shaped mark for use as a thermal reflector and the Company’s corporate
logo. The Company also holds trademarks for the Event-Linkâ
monitoring system, the Edentec Assuranceâ
monitor, Edentrendâ
software and the AMIâ
and AMIâPlus
monitors.

The
Company holds various patents for its blood pressure measurement technology
which it believes provide it with a competitive market advantage. In
addition, it has patents with respect to apnea monitoring technology. Although
the Company holds such patents and has patents pending related to certain of its
products, it does not believe that its business as a whole is significantly
dependent upon patent protection with the exception of the FORE-SIGHT cerebral
oximetry technology.

The
FORE-SIGHT NIRS cerebral oximetry technology has four U.S. patents issued (U.S.
6,456,862 B2, 7,047,054, 7,072,701, and 7,313,427) and one international patent
issued. In addition, the Company currently has several patents pending with U.S.
and foreign patent offices. The Company believes the design concepts covered in
its current patent applications and provisional patent applications are
important to providing a cerebral oximeter capable of absolute brain tissue
oxygen saturation measurements.

Other
patents have previously been issued to third parties involving optical
spectroscopy and the interaction of light with tissue, some of which relate to
the use of optical spectroscopy and NIRS in the area of brain metabolism
monitoring. The Company is not aware of any infringement by its products of the
claims of any issued patents, and no charge of patent infringement has been
asserted against the Company.

The
Company also relies on trade secret, copyright and other laws and on
confidentiality agreements to protect its technology. The Company has
copyright protection for the software used in its blood pressure, apnea and
cerebral oximeter monitors.

The
Company will continue to seek patent, trademark and copyright protections as it
deems advisable to protect the markets for its products and its R&D
efforts. We believe that neither our patents nor our other legal
rights will necessarily prevent third parties from developing or using a similar
or a related technology to compete against our products.

Employees

As of
December 31, 2008, the Company had 172 employees, of which 170 were
full-time. The Company has no collective bargaining agreements and
believes that relations with its employees are good.

Page 10

Government
Regulation

Medical
products of the type currently being marketed and under development by the
Company are subject to regulation under the Food, Drug and Cosmetic Act (the
“FD&C Act”) and numerous acts and amendments such as the Quality System
Regulations (“QSR”), often referred to as Good Manufacturing Practices
(“GMP’s”).

In
addition, depending upon product type, the Company must also comply with those
regulations governing the Conduct of Human Investigations, Pre-Market
Notification Regulations and other requirements, as promulgated by the
FDA. The FDA is authorized to inspect a device, its labeling and
advertising, and the facilities in which it is manufactured in order to ensure
that the device is not manufactured or labeled in a manner which could cause it
to be in violation of the FD&C Act.

The FDA
has adopted regulations which classify medical devices based upon the degree of
regulation believed necessary to assure safety and efficacy. A device
is classified as a Class I, II, or III device. Class I devices are
subject only to general controls. Class II devices, in addition to
general controls, are or will be subject to “performance
standards.” Most devices are also subject to the 510(k) pre-market
notification provision. In addition, some Class III devices require
FDA pre-market approval before they may be marketed commercially because their
safety and effectiveness cannot be assured by the general controls and
performance standards of Class I or II devices.

The
Company’s products are primarily Class I and II devices and several of them have
required FDA notification under Section 510(k) of the FD&C Act.

The FDA
has the authority to, among other things, deny marketing approval until all
regulatory protocols are deemed acceptable, halt the shipment of defective
products, and seize defective products sold to customers. Adverse
publicity from the FDA, if any, could have a negative impact upon
sales. In the last factory inspection of the Company there were no
material non-conformities.

International Regulatory
Compliance

CASMED
maintains certification to ISO 13485:2003 by the accredited body, BSI Inc., in
each of its manufacturing facilities. These certifications allow CASMED to use
the “CE” mark on its products. The CE mark is required for medical
devices to gain access to the European Union common market. The FDA,
recognizing the value of this universally accepted quality system, has patterned
its Quality System Regulations after ISO 9001 and ISO 13485. CASMED maintains
full compliance with the FDA Quality System Regulations and has recently been
recertified to ISO-13485.

Manufacturing and Quality
Assurance

The
Company assembles its products at its facilities in Branford, Connecticut and
Jacksonville, Florida. The various components for the products, which
include plastic sheeting, plastic moldings, wire, printed circuit boards,
semi-conductor circuits, electronic and pneumatic components, power supplies,
proprietary software and many other parts and sub-assemblies are obtained from
outside vendors. The Company has not experienced any sustained
interruption in production or the supply of components and does not anticipate
any difficulties in obtaining the components necessary to manufacture its
products.

Quality
control procedures are performed by the Company at its facilities and
occasionally at its suppliers’ facilities to standards set forth in the FDA’s
“Quality System Regulations.” These procedures include the inspection
of components and full testing of finished goods. The Company has a
controlled environment where the final assembly of single-patient-use products
is conducted.

Customers

Our five
largest customers accounted for approximately 31%, 26%, and 33% of revenues in
2008, 2007, and 2006, respectively. Among these customers, Medtronic,
Inc., customarily the Company’s largest customer, accounted for 11% of revenues
during both 2008 and 2006. During 2007, no customer accounted for 10% or more of
the Company’s revenues. During January 2007, Medtronic announced a voluntary
suspension of U.S. product shipments from its Physio-Control division. Despite
strong sales to Medtronic during the latter six months of 2007, overall sales to
Medtronic for 2007 decreased approximately $1,510,000 from 2006 and represented
approximately 7% of overall

Page 11

revenues.

Backlog

The
Company’s backlog includes orders pursuant to long-term OEM agreements as well
as orders for products shippable on a current basis. Total backlog, therefore,
is not a meaningful indicator of future sales.

Corporate
Information

CAS
Medical Systems, Inc. is a Delaware corporation organized in 1984. Our corporate
offices are located at 44 East Industrial Road, Branford, CT 06405, and our
telephone number is (203) 488-6056. Our website address is www.casmed.com. The
information on, or that can be accessed through, our website is not a part of
this report.

Item 1A. Risk
Factors

Our
business faces many risks. If any of the events or circumstances
described in the following risk factors actually occurs, our business, financial
condition or results of operations could suffer, and the trading price of our
common stock could decline. The risks described below may not be the
only risks we face. Additional risks that we do not yet know of or
that we currently believe are immaterial may also impair our business
operations. You should consider the following risks, as well as the
other information included or incorporated by reference in this Form 10-K before
deciding to invest in our common stock.

We
Are Subject To Risks Related To Future Liquidity

Our
ordinary capital needs are expected to be met from a combination of cash flows
from operations and borrowings under our line-of-credit agreement. Future cash
flows, however, may be impacted by a number of factors, including changing
market conditions, market acceptance of the FORE-SIGHT system, changes in
payment terms to one or more major suppliers, loss of one or more key customers,
or failure to meet financial covenants under our current or any future loan
agreement.

We
believe that our current levels of working capital and available debt financing
are insufficient to fund major growth initiatives, such as significant increases
in our sales and marketing personnel, or material acquisitions. Any major growth
initiatives would require us to seek other sources or forms of debt or equity
capital. There can be no assurance that we will be successful in securing such
funding for major initiatives. Any issuance of equity or equity-linked
securities would dilute the ownership interest of existing
shareholders.

We
Are a Small Company In A Highly Competitive Industry

Competition
from other medical device companies, diversified healthcare companies and
research and academic institutions is intense and expected to
increase. Many companies engaged in the medical device sector have
substantially greater financial and other resources and development capabilities
than we do, and have substantially greater experience in testing of products,
obtaining regulatory approvals and manufacturing and marketing medical
devices. Therefore, our competitors may succeed in obtaining approval
for products more rapidly than we can. Other companies may succeed in
developing and commercializing products earlier than we do. In
addition to competing with universities and other research institutions in the
development of products, technologies and processes, the Company may compete
with other companies in acquiring rights to products or technologies
from universities. Also, the medical device
market is experiencing increasing customer concentration,
due to the emergence of large purchasing groups. We cannot assure you
that we will develop products that are more effective or achieve greater market
acceptance than competitive products, or that our competitors will not succeed
in developing products and technologies that are more effective than those being
developed by us or that would render our products and technologies less
competitive or obsolete. Moreover, there can be no assurance that we
will be able to successfully sell to large purchasing groups, which are
increasingly looking to suppliers that can provide a broader range of products
than we currently offer.

Page 12

Our
Business Is Impacted By Customer Concentration.

Our five
largest customers accounted for approximately 31%, 26%, and 33% of revenues in
2008, 2007, and 2006, respectively. Among these customers, Medtronic,
Inc., customarily the Company’s largest customer, accounted for 11% of revenues
during both 2008 and 2006. During 2007, no customer accounted for 10% or more of
the Company’s revenues. During January 2007, Medtronic announced a voluntary
suspension of U.S. product shipments from its Physio-Control division. Despite
strong sales to Medtronic during the latter six months of 2007, overall sales to
Medtronic for 2007 decreased approximately $1,510,000 from 2006 and represented
approximately 7% of overall revenues. The loss of one or more of the major
customers noted above could result in a material adverse effect on the Company’s
financial condition, our cash flows and results of operations.

The
Recent Global Economic Crisis Has Had And May Continue To Have A Negative Effect
On Our Business And Operations

The
recent global economic crisis has caused, among other things, lower business
spending, which has had and is expected to continue to have a negative effect on
our business and results of operations. Many of our customers and
suppliers have been affected by the current economic turmoil. Current
or potential customers and suppliers may no longer be in business, may be unable
to fund purchases or determine to reduce purchases, all of which has led and is
expected to continue to lead to reduced demand for our products and increased
customer payment delays. Further, suppliers may not be able to supply
us with needed components on a timely basis, may increase prices or go out of
business, which could result in our inability to met customer demand or affect
our gross margins. The timing and nature
of any recovery in the economy remains uncertain, and there can be no assurance
that market conditions will improve in the near future or that
our results will not be materially and adversely affected. Such
conditions make it very difficult to forecast operating results, make business
decisions and identify and address material business risks.

We
Are Devoting Substantial Resources To The Development And Marketing Of Our
Cerebral Oximetry Products

We expect
to devote a significant amount of resources to continue the development and
marketing of our FORE-SIGHT cerebral oximetry products. We believe that
substantial resources are required to further our opportunity in the markets for
these products. Such investments include further research and development,
including significant expenditures for clinical studies, manufacturing
equipment, further expansion of a direct sales force, marketing expenditures and
general working capital requirements. There can be no assurance that we will be
successful in these

endeavors.

The
Sale Of Our Products May Result In Significant Product Liability
Exposure

As a
manufacturer of medical diagnostic equipment, we could face product liability
claims. We maintain product liability insurance in an aggregate
amount of $5 million. We cannot assure you that this insurance
coverage will be adequate to cover any product liability claims that occur in
the future or that product liability insurance will continue to be available at
reasonable prices.We are
currently a defendant in a product liability action which is scheduled for trial
during mid-2009. We believe that our product liability insurance is
sufficient to cover any damages and costs that are likely with respect to this
matter.
Any product liability judgments or settlements in excess of
insurance coverage could have a material adverse effect on our business and
results of operations.

Our
Business Could Be Adversely Affected If We Cannot Protect Our Proprietary
Technology Or If We Infringe On The Proprietary Technology Of
Others.

Our
proprietary technology aids our ability to compete effectively with other
companies in certain markets in which we compete. Although we have been awarded,
have filed applications for, or have been licensed under numerous patents, these
patents may not fully protect our technology or competitive position. Further,
our competitors may apply for and obtain patents that will restrict our ability
to make and sell our products.

Our
competitors may intentionally infringe our patents. Third parties may also
assert infringement claims against us in the future. Litigation may be necessary
to enforce patents issued to us, to protect our trade secrets or know-how, to
defend ourselves against claimed infringement of the rights of others or to
determine the scope and validity of the proprietary rights of others. The
defense and prosecution of patent suits are both costly and time-consuming, even
if the outcome is favorable to us. Such proceedings can be extremely expensive
and their outcome very unpredictable. An adverse outcome in the defense of a
patent suit could cause us to lose proprietary rights, subject us to
significant

Page 13

liabilities
to third parties or require us to license rights from third parties or to cease
selling our products. Any of these events could have a material adverse effect
on our business, operating results and financial condition. We also rely on
unpatented proprietary technology that others may independently develop or
otherwise obtain access to. Our inability to maintain the proprietary nature of
our technologies could negatively affect our revenues and earnings.

We
Are Subject To Significant Government Regulation

Our
business is subject to varying degrees of governmental regulation in the
countries in which we operate. In the United States, our products are
subject to regulation as medical devices by the FDA, and by other federal and
state agencies. These regulations pertain to the manufacturing,
labeling, development and testing of our devices as well as to the maintenance
of required records. An FDA regulation also requires prompt reporting by all
medical device manufacturers of an event or malfunction involving a medical
device where the device caused or contributed to death or serious injury or is
likely to do so.

Federal
law provides for several routes by which the FDA reviews medical devices before
their entry into the marketplace. Medical products of the type
currently being marketed and under development by us are subject to regulation
under the FD&C Act and numerous acts and amendments such as the Quality
System Regulations which replaced the regulations formerly called Good
Manufacturing Practices. In addition, depending upon product type, we
must also comply with those regulations governing the Conduct of Human
Investigations, Pre-Market Regulations and other requirements, as
promulgated by the FDA. The FDA is authorized to inspect a device, its labeling
and advertising, and the facilities in which it is manufactured in order to
ensure that the device is not manufactured or labeled in a manner which could
cause it to be injurious to health.

The FDA
has adopted regulations which classify medical devices based upon the degree of
regulation believed necessary to assure safety and efficacy. A device is
classified as a Class I, II, or III device. Class I devices are subject only to
general controls. Class II devices, in addition to general controls, are or will
be subject to “performance standards.” Most devices are also subject to the
510(k) pre-market notification provision. In addition, some Class III devices
require FDA pre-market approval before they may be marketed commercially because
their safety and effectiveness cannot be assured by the general controls and
performance standards of Class I or II devices. Our products are
primarily Class I and II devices and several of them have required FDA
notification under Section 510(k) of the FD&C Act.

Satisfaction
of clearance or approval requirements may take up to several years or more and
may vary substantially based upon the type, complexity and novelty of the
product. The effect of government regulation may be to delay
marketing of new products for a considerable or indefinite period of time, to
impose costly procedures upon our activities and to furnish a competitive
advantage to larger companies that compete with us. We cannot assure
you that FDA or other regulatory clearance or approval for any products we
develop will be granted on a timely basis, if at all, or, once granted, that
clearances or approvals will not be withdrawn or other regulatory action taken
which might limit our ability to market our proposed products. Any
delay in obtaining or failure to obtain these clearances or approvals would
adversely affect the manufacturing and marketing of our products and the ability
to generate additional product revenue.

We
Rely To A Significant Degree On Our Proprietary Rights

We rely
on a combination of patents, trade secrets, trademarks and non-disclosure
agreements to protect our proprietary rights. We cannot assure you
that our patent applications will result in the issuance of patents or that any
patents owned by us now or in the future will afford protection against
competitors that develop similar technology. We also cannot assure
you that our non-disclosure agreements will provide meaningful protection for
our trade secrets or other proprietary information. Moreover, in the
absence of patent protection, our business may be adversely affected by
competitors who independently develop substantially equivalent or superior
technology.

It is
possible that we may need to acquire licenses to, or to contest the validity of,
issued or pending patents of third parties relating to our technology or to
products presently marketed or under development by us. In addition,
we cannot assure that any license required under any patent would be made
available to us on acceptable terms, if at all, or that we would prevail in any
patent litigation.

Page 14

We
Are Party To An Arbitration Proceeding

On May 8,
2007, the Company signed an exclusive distribution agreement (the “Agreement”)
with Analogic Corporation (“Analogic”) under which the Company obtained
worldwide exclusive rights to market the Analogic Lifegard® family of
non-invasive patient monitors. Under the Agreement, Analogic would co-brand the
devices and reconfigure its Lifegard II monitor to include the Company’s MAXNIBP
branded non-invasive blood pressure and other branded
technologies. Accordingly, the Company would reimburse Analogic approximately
$900,000 upon meeting agreed milestone dates for such efforts. As of December
31, 2008, the Company had made payments to Analogic of $90,000.

On
November 24, 2008, Analogic commenced arbitration against the Company contending
that the Company breached the Agreement. Analogic is seeking damages
of approximately $765,000 for costs it allegedly incurred in performing under
the Agreement including winding down costs and additional remedies which may
provide for relief totaling double or treble damages, in addition to attorney
fees. The Company denies Analogic’s claims and is asserting a
counterclaim for damages in excess of those sought by Analogic. The arbitration
hearing is expected to be conducted in the second quarter of
2009. There can be no assurance as to the ultimate outcome of this
proceeding.

During
2008, the Company recorded sales of Analogic products of
$2,173,000.

Our
Products May Become Rapidly Obsolete

The areas
in which we are developing, distributing, and/or licensing products involve
rapidly developing technology. Others may develop products that might cause
products being developed, distributed or licensed by us to become obsolete or
uneconomical or result in products superior to our products.

Our
international sales subject us to currency and related risks. Our
international sales accounted for 26% of our total net sales for the 2008 fiscal
year. We expect that international sales will continue to constitute
a significant portion of our business. Although we sell our products
in United States dollars and are not subject to significant currency risks, an
increase in the value of the United States dollar relative to foreign currencies
in our international markets could make our products less price competitive in
these markets.

An
Acquisition Of The Company May Be Hindered

Our Board
of Directors is authorized to issue from time to time, without stockholder
authorization, shares of preferred stock, in one or more designated series or
classes. We are also subject to a Delaware statute regulating
business combinations. These provisions could discourage, hinder or
preclude an unsolicited acquisition of the Company and could make it less likely
that stockholders receive a premium for their shares as a result of any takeover
attempt.

Sales
Of A Substantial Number Of Shares Of Our Common Stock In The Public Market
Originally Issued Through The Exercise Of Options Or Warrants Could Adversely
Affect The Market Price Of Our Common Stock And May Also Adversely Affect Our
Ability To Raise Additional Capital

As of
December 31, 2008, options and warrants for the purchase of 1,654,526 shares of
our common stock were outstanding. Historically, our common stock has
been thinly traded. This low trading volume may have had a
significant effect on the market price of our common stock, which may not be
indicative of the market price in a more liquid market.

We Depend Highly On Certain Key
Management Personnel

We
believe that our future success will depend to a significant extent on the
efforts and abilities of our senior management, in particular, Andrew Kersey,
our President and Chief Executive Officer, and Jeffery Baird, our Chief
Financial Officer. The loss of the services of Messrs. Kersey or
Baird could have a material adverse effect on our business and results of
operations.

Page
15

We
Do Not Expect To Pay Cash Dividends

We have
not paid cash dividends on our common stock since inception, and at this time we
do not anticipate that we will pay cash dividends in the foreseeable
future.

Item
1B. Unresolved Staff Comments

None.

Item 2.
Properties

The
Company currently leases four separate operating facilities as described in
further detail below.

On
September 6, 2007, the Company closed the sale and leaseback of its headquarters
and manufacturing facility in Branford, Connecticut (the “Property”) which
comprises approximately 24,000 square feet of office and manufacturing
space. Net proceeds from the sale were $2,791,529 of which $928,872
was used to retire the related outstanding mortgage debt. The gain of $1,346,373
realized on the sale has been deferred and will be recognized in operations
against rent expense over the initial term of the lease. The lease has an
initial term of ten years expiring on September 6, 2017 and contains an option
for two additional five-year periods. The lease provides for an annual base rent
in years one through five of $244,800 and $268,800 in years six through ten. The
Company will recognize rent expense on a straight-line basis
over the ten years. Under the lease, the Company is responsible for the costs
of utilities, insurance, taxes and maintenance expenses. Further, the
Company is required to maintain at least $600,000 in cash and cash equivalents
(increasing at 3% per annum) and net current assets of not less than
$3,600,000.

In
addition, the Company has a right of first offer to lease any additional space
or building built by the lessor on the Property, subject to certain
restrictions. The Company also has the right to require the lessor to
build an addition or additional building (“Expansion Premises”), subject to
certain restrictions. Upon the delivery of any Expansion Premises,
the term of the Lease would extend for a ten year term. The base rent for the
Expansion Premises shall be the greater of the then prevailing market rent or an
amount equal to a return on actual costs of construction of the greater of 250
basis points over the rate on ten year U.S. Treasury Notes, or
8%. Upon delivery of the Expansion Premises, the lessor would assume
obligations under the Company’s leases of its two adjacent properties, in
exchange for a payment equal to three months rent and certain unamortized costs
incurred in these facilities.

The
Company is also leasing two properties adjacent to its corporate facilities.
Approximately 8,300 square feet of office and limited warehouse space is being
leased under an agreement effective June 1, 2006, as amended, and expires on May
31, 2014. Minimum annual rental expense is approximately $78,000
excluding apportioned real estate taxes and certain utility costs. Approximately
9,600 square feet of office and warehouse space is being leased under an
agreement effective July 1, 2007, as amended, and expires June 30, 2015. Minimum
annual rental expense is approximately $83,000 excluding apportioned real estate
taxes and certain common area maintenance charges.

The
Company’s subsidiary, Statcorp, is leasing approximately 17,500 square feet of
warehouse and office space under an agreement, as amended, which expires March
31, 2012. Minimum annual rental expense is approximately $84,000
excluding apportioned real estate taxes and certain common area maintenance
charges.

The
Company believes that its premises meet its current and expected operating needs
and are adequately insured.

Item 3. Legal
Proceedings

The
manufacture and sale of our products exposes us to product liability claims and
product recalls, including those which may arise from misuse or malfunction of,
or design flaws in, our products or use of our products with components or
systems not manufactured or sold by us. Product liability claims or
product recalls, regardless of their ultimate outcome, could require us to spend
significant time and money in litigation or to pay significant
damages. We are currently a defendant in a product liability action
which is scheduled for trial during mid 2009. We believe that our
product liability insurance is sufficient to cover any damages and costs that
are likely with respect to this matter. There can be no assurance however, that
this will be the case with respect to any future

Page
16

matters. Furthermore,
we may not be able to obtain insurance in the future at satisfactory rates or in
adequate amounts.

In
addition, publicity pertaining to the misuse or malfunction of, or design flaws
in, our products could impair our ability to successfully market and sell our
products and could lead to product recalls.

On May 8,
2007, the Company signed an exclusive distribution agreement (the “Agreement”)
with Analogic Corporation (“Analogic”) under which the Company obtained
worldwide exclusive rights to market the Analogic Lifegard® family of
non-invasive patient monitors. Under the Agreement, Analogic would co-brand the
devices and reconfigure its Lifegard II monitor to include the Company’s MAXNIBP
branded non-invasive blood pressure and other branded technologies. Accordingly,
the Company would reimburse Analogic approximately $900,000 upon meeting agreed
milestone dates for such efforts. As of December 31, 2008, the Company had made
payments to Analogic of $90,000.

On
November 24, 2008, Analogic commenced arbitration against the Company contending
that the Company breached the Agreement. Analogic is seeking damages
of approximately $765,000 for costs it allegedly incurred in performing under
the Agreement including winding down costs and additional remedies which may
provide for relief totaling double or treble damages, in addition to attorney
fees. The Company denies Analogic’s claims and is asserting a
counterclaim for damages in excess of those sought by Analogic. The arbitration
hearing is expected to be conducted in the second quarter of
2009. There can be no assurance as to the ultimate outcome of this
proceeding.

During
2008, the Company recorded sales of Analogic products of
$2,173,000.

In
addition, we may become in the normal course of our business operations a party
to other legal proceedings in addition to those described in the paragraphs
above. None of these other proceedings would be expected to have a
material adverse impact on our results of operations, financial condition, or
cash flows.

Effective
December 2005, the common stock of the Company began trading on the NASDAQ
Capital Market, under the symbol “CASM.” Effective December 2006, the
common stock of the Company began trading on the NASDAQ Global Market while
continuing to utilize the CASM symbol.

The
following table shows the high and low sales prices for the Company’s common
stock during each quarterly period for the last two years.

Quarter Ended

High

Low

March
31, 2007

$

8.40

$

6.26

June
30, 2007

$

8.51

$

6.27

September
30, 2007

$

7.50

$

4.25

December
31, 2007

$

6.47

$

4.76

March
31, 2008

$

5.54

$

4.05

June
30, 2008

$

4.30

$

2.81

September
30, 2008

$

4.21

$

2.72

December
31, 2008

$

4.00

$

1.66

Page 17

The
following table sets forth the approximate number of holders of record of common
stock of the Company on December 31, 2008.

Title of Class

Number of Shareholders

Common
stock, $.004 par value

1,862

To date,
no cash dividends have been declared on the Company’s common
stock. The Company does not currently intend to pay a cash dividend
in the near future.

The
Company did not issue any shares of common stock during the fourth quarter of
2008 that were not registered under the Securities Act. In addition,
the Company did not repurchase any of its common stock during the fourth quarter
of 2008.

Item 6. Selected
Financial Data

For
Year Ended December 31,

2008(1)

2007(1)

2006(1)

2005(2)

2004

(amounts
in thousands, except per

share
amounts)

Net
sales

$

40,649

$

38,232

$

35,202

$

26,884

$

20,059

Cost
of sales

26,748

24,585

20,803

15,092

11,056

Gross
profit

13,901

13,647

14,399

11,792

9,003

Operating
expenses:

Research
and development

$

2,028

$

2,254

$

2,762

$

1,631

$

1,033

Selling,
general and administrative

12,165

10,815

8,659

7,438

6,263

Total
operating expenses

14,193

13,069

11,421

9,069

7,296

Operating
(loss) income

(291

)

579

2,978

2,723

1,707

(Loss)
income before income taxes

(564

)

304

2,730

2,556

1,635

Net
(loss) income

(388

)

306

1,747

1,815

1,205

Net
(loss) income per

diluted
common share

$

(0.04

)

$

0.03

$

0.14

$

0.15

$

0.11

Diluted
shares outstanding

11,032

12,212

12,147

11,729

11,128

At
Year End:

Working
capital

$

10,819

$

10,388

$

9,096

$

7,482

$

5,369

Long-term
debt, less current portion

1,708

2,323

3,807

4,416

1,035

Total
assets

23,685

23,888

21,443

17,918

10,993

Stockholder’s
equity

$

14,900

$

13,751

$

12,625

$

9,117

$

7,156

(1)

Operating
income reduced by $410, $303 and $390 for 2008, 2007 and 2006,
respectively, from stock compensation expense. The Company adopted FAS
123R – Share-Based Payment, as of January 1,
2006.

(2)

2005
operating income includes $401 credit from curtailment gain of
post-retirement benefit plan.

2005 reflects the acquisition of Statcorp,
Inc. on May 15, 2005.

Item
7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Certain
statements included in this report, including without limitation statements in
the Management’s Discussion and Analysis of Financial Condition and Results of
Operations, which are not historical facts, are “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company’s current expectations
regarding future events. The Company cautions that such statements are qualified
by important factors that could cause actual results to differ materially from
expected results which may be contained in the forward-looking statements. All
forward-looking statements involve risks and uncertainties, including, but not
limited to, the following: potential liquidity constraints; price and
product competition; rapid technological changes; dependence on new product
development; failure to introduce new products effectively or on a timely basis;
the mix of products

Page 18

sold;
supply and prices of raw materials and products; customer demand for the
Company’s products; regulatory actions; changes in reimbursement levels from
third-party payors; product liability or other litigation claims; changes in
economic conditions that adversely affect the level of demand for the Company’s
products; changes in foreign exchange markets; changes in financial markets;
changes in the competitive environment; and other risks described in Item 1A of
this filing.

Year Ended December 31, 2008
Compared to Year Ended December 31, 2007

The
Company recorded a net loss of $388,000 for 2008 or ($0.04) per basic and
diluted common share compared to net income of $306,000 or $0.03 per diluted
common share for 2007. Pre-tax (loss) income for 2008 and 2007 were affected by
$410,000 and $303,000, respectively, of stock compensation expense.

The
operating loss for 2008 was $291,000 or 0.7% of net sales compared to operating
income of $579,000 or 1.5% of net sales for 2007. Several key factors
contributed to the decrease in operating income during 2008. Cost of sales as a
percentage of sales increased to 65.8% from 64.3% for 2007 primarily as a result
of higher costs in the first quarter of 2008. Lower than expected sales during
that period combined with fixed manufacturing costs resulted in a 70.1% cost of
sales percentage during the first quarter. Operating expenses for 2008 increased
$1,124,000 or 9% to reach $14,193,000 or 34.9% of net sales from $13,069,000 or
34.2% of net sales for 2007. Sales and marketing expenses related to the
cerebral oximetry market reached $3,094,000 in 2008, an increase of $1,355,000
over 2007 spending levels.

The
following table provides comparative results of net sales by product and
geographic category:

Year
Ended

Year
Ended

Increase

(amounts
in thousands)

December 31, 2008

December 31, 2007

(Decrease)

Bedside
Monitoring

$

15,889

$

18,640

$

(2,751

)

Critical
Care Monitoring

2,258

315

1,943

Blood
Pressure Measurement Technology

7,769

5,825

1,944

Supplies/Service

14,733

13,452

1,281

$

40,649

$

38,232

$

2,417

Domestic
Sales

$

30,032

$

29,601

$

431

International
Sales

10,617

8,631

1,986

$

40,649

$

38,232

$

2,417

Net sales
for 2008 increased 6% or $2,417,000 to $40,649,000 from $38,232,000 for 2007.
Bedside monitoring sales decreased $2,751,000 or 15% from 2007 primarily due to
lower sales levels of vital signs monitors and accessories sold to the Veterans
Administration and lower sales of veterinary products sold under a private label
agreement. Approximately $311,000 of the veterinary sales are classified as of
2008 as blood pressure measurement technology sales. Increased sales of Analogic
products marketed by the Company since May 2007 partially offset reductions in
vital signs products sales. Critical care monitoring sales increased $1,943,000
to $2,258,000 and represent the Company’s Fore-Sight cerebral oximetry
technology launched during mid-2007. Net sales in this category are
primarily sensor related (72% for 2008). In certain U.S. markets, the
Company routinely places the monitor and retains ownership of the device in
exchange for commitments to purchase disposable sensors. During 2008, the
Company placed or sold approximately 116 monitors with customers bringing the
installed base of Fore-Sight monitors worldwide to 151 as of the end of 2008.
Blood pressure measurement technology sales increased $1,944,000 or 33% due to a
rebound of sales to a key customer, Medtronic. 2007 sales to Medtronic were
affected by a voluntary suspension of U.S. product shipments from its
Physio-Control division announced during January 2007. Sales of supplies and
service increased $1,281,000 or 10% over 2007 sales and are primarily comprised
of sales of blood pressure cuffs accounting for approximately 71% of sales in
this category. Sales to the U.S. market accounted for $30,032,000 or 74% of the
total net sales reported for 2008, an increase of $431,000 or 1% over the
$29,601,000 reported for 2007. International sales accounted for $10,617,000 or
26% of total net sales, an increase of $1,986,000 or 23% over 2007 sales levels.
The growth in international sales was led by sales of Analogic products and
blood pressure cuff sales.

Page 19

Cost of
sales as a percentage of net sales increased to 65.8% for 2008 compared to 64.3%
of net sales for 2007. The increase in cost of sales as a percentage of sales
for 2008 was primarily related to the first quarter of 2008 where lower than
expected sales combined with fixed manufacturing costs. The Company is focusing
its efforts during 2009 to achieve cost reductions to improve overall gross
profit levels.

R&D
expenses decreased $226,000 or 10% to $2,028,000 for 2008 from $2,254,000 for
2007. R&D expenses are reported net of reimbursements received from the
National Institutes of Health (“NIH”) pertaining to the Company’s development of
its Near-Infrared Spectroscopy (“NIRS”) technology. Amounts reimbursed from the
NIH, including accruals, for 2008 and 2007 were $582,000 and $480,000,
respectively. Increased reimbursements for 2008 reflect the fact that during
September 2007 the Company was awarded a three year grant totaling approximately
$2,800,000 to support its NIRS research. R&D expenses before NIH
reimbursement approximated 6.4% and 7.2%, respectively, of 2008 and 2007
revenues.

Selling,
general and administrative (“S,G&A”) expenses increased $1,350,000 or 12.5%
to $12,165,000 or 29.9% of net sales for 2008 from $10,815,000 or 28.3% of net
sales for 2007. Sales and marketing expenses in 2008 pertaining to the Company’s
Fore-Sight cerebral oximeter were approximately $3,094,000 and accounted for
100% of the overall increase in S,G&A spending. Increased manufacturers
representative commission expenses from increased sales, salaries and related
benefits from expanded direct sales personnel costs, travel and entertainment
and depreciation expenses were primarily responsible for the increase in the
cerebral oximetry related expenses. General and administrative (“G&A”)
expenses increased by $219,000 or 5.9% as a result of increases in salaries and
related benefits and legal and accounting expenses which were partially offset
by reductions in Sarbanes Oxley section 404 compliance costs,
investor relations fees and company-wide incentive payouts. Together, the
G&A expenses were offset by reductions in non-cerebral oximetry related
marketing costs and decreased international sales support expenses.

Net
interest expense decreased $3,000 to $272,000 for 2008 from $275,000 for 2007 as
a result of reduced balances on the Company’s long-term debt loan. Higher
average balances on the line-of-credit facility for 2008 were offset by reduced
costs of borrowed funds.

The
income tax benefit for 2008 was $176,000 compared to a benefit of $3,000 for
2007. The benefit for 2008 is related to taxable losses and federal R&D
related tax credits. The benefit for 2007 is primarily related to an
exchange of $155,000 of state tax carry-forwards for reduced cash receipts
payable to the Company partially offset by certain non-deductible expenses
including stock option compensation and entertainment costs.

Year Ended December 31, 2007
Compared to Year Ended December 31, 2006

Net
income for 2007 was $306,000 or $0.03 per common share on a diluted basis
compared to $1,747,000 or $0.14 per diluted common share for 2006. Pre-tax
income for 2007 and 2006 were affected by $303,000 and $390,000, respectively,
of stock compensation expense of which $98,000 and $343,000, respectively, was
non-deductible for income tax purposes.

Operating
income for 2007 was $579,000 or $1.5% of sales compared to $2,978,000
or 8.5% of sales for 2006. Several key factors contributed to the
decrease in operating income levels during 2007 including significant
investments in the cerebral oximetry market particularly in the areas sales and
marketing expenditures which increased approximately $1,300,000 over 2006
spending levels; product mix issues largely caused by reduced OEM sales which
normally carry higher than average gross margin rates and international sales of
Analogic products; increased manufacturing overhead costs including Fore-Sight
cerebral oximetry start-up costs; and Sarbanes Oxley 404 internal control
consulting fees of approximately $164,000. The Company generated sales of
$38,232,000 for 2007, an increase of $3,030,000 or 8.6% over sales of
$35,202,000 for 2006. The following table provides comparative
results by product and geographic category:

Year
Ended

Year
Ended

Increase

(amounts
in thousands)

December 31, 2007

December 31, 2006

(Decrease)

Bedside
Monitoring

$

18,640

$

16,071

$

2,569

Critical
Care Monitoring

315

—

315

Blood
Pressure Measurement Technology

5,825

6,571

(746

)

Page
20

Supplies/Service

13,452

12,560

892

$

38,232

$

35,202

$

3,030

Domestic
Sales

29,601

27,519

2,082

International
Sales

8,631

7,683

948

$

38,232

$

35,202

$

3,030

Sales for
2007 increased 8.6% or $3,030,000 to $38,232,000 from $35,202,000 for 2006.
Bedside monitoring sales increased $2,569,000 or 16% over 2006 led by vital
signs monitoring and accessories sales primarily sold to the VA and sales of
Analogic products marketed by the Company since May 2007, partially offset by
reductions in apnea monitoring products sales. Critical care monitoring sales
represent the Company’s Fore-Sight cerebral oximetry technology launched during
mid-2007. Sales in this category are primarily sensor related
where the Company places the monitor and retains ownership of the device in
exchange for commitments to purchase disposable sensors. Blood pressure
measurement technology sales decreased $746,000 or 11% due to reductions in
sales to a key customer, Medtronic. During January 2007, Medtronic announced a
voluntary suspension of U.S. product shipments from its Physio-Control division.
Despite strong fourth quarter sales which exceeded the prior year fourth
quarter, overall sales to Medtronic for 2007 decreased $1,510,000 as compared to
2006. Medtronic represented approximately 11% of the Company’s sales for the
full year 2006. Sales of supplies and service increased $892,000 or 7% over 2006
sales and are primarily comprised of sales of blood pressure cuffs accounting
for approximately 71% of sales in this category. Sales to the U.S. market
accounted for $29,601,000 or 77% of the total sales for 2007, an increase of
$2,082,000 or 8% over the $27,519,000 reported for 2006. International sales
accounted for $8,631,000 or 23% of total revenues, an increase of $948,000 or
12% over 2006 sales levels.

Cost of
sales as a percentage of net sales increased to 64.3% for 2007 compared to 59.1%
of net sales for 2006. The increase in cost of sales as a percentage of sales
for 2007 was related to a number of causes including lost gross margins on the
shortfall in OEM sales which normally carries higher gross margins
than other products sold by the Company; lower margins on Analogic product sales
particularly in the fourth quarter of 2007 primarily as a result of additional
international business; NIRS manufacturing start-up costs; increased indirect
manufacturing overhead costs to support the Company’s expanded operations; and
reductions in accrued post-retirement benefit costs during 2006 for
changes made to terminate the Company’s plan during 2005.

R&D
expenses decreased $508,000 or 18% to $2,254,000 for 2007 from $2,762,000 for
2006. R&D expenses are reported net of reimbursements received from the
National Institutes of Health (“NIH”) pertaining to the Company’s development of
its Near-Infrared Spectroscopy (“NIRS”) technology. Amounts reimbursed from the
NIH, including accruals, for 2007 and 2006 were $480,000 and $21,000,
respectively. Increased reimbursements for 2007 reflect the fact that during
September 2007 the Company was awarded a three year grant totaling approximately
$2,800,000 million to support its NIRS research. R&D expenses before NIH
reimbursement approximated 7.2% and 7.9%, respectively, of 2007 and 2006
revenues. Increased NIH reimbursements offset increases in project material
costs, clinical evaluations and salaries and related fringe
benefits.

Selling,
general and administrative (“S,G&A”) expenses increased $2,156,000 or 25% to
$10,815,000 or 28% of sales for 2007 from $8,659,000 or 25%
of sales for 2006. Sales and marketing expenses in 2007 pertaining to
the Company’s Fore-Sight cerebral oximeter were approximately $1,800,000 and
accounted for nearly $1,300,000 or 60% of the increase in S,G&A spending.
The Company also increased its investments in personnel in the areas of
marketing, customer service, international sales consultants and domestic sales
management in order to support the Company’s
growth. Additionally, increases in general insurance costs,
amortization and depreciation, and employee health care costs also impacted
S,G&A expenses. During 2007, the Company also incurred $164,000
in consulting fees pertaining to its Sarbanes Oxley 404 compliance
efforts.

Net
interest expense increased $27,000 to $275,000 for 2007 from $248,000 for 2006
as a result of borrowings on the line-of-credit facility partially offset by
reductions in interest expenses associated with lower balances on the Company’s
Statcorp acquisition loan and the payoff of the mortgage on the Company’s
headquarters facility.

The
income tax benefit for 2007 was $3,000 compared to income tax expense of
$983,000 for 2006. The benefit for 2007 was primarily related to an exchange of
$155,000 of state tax carry-forwards for reduced cash receipts payable to the
Company partially offset by certain non-deductible expenses including stock
option compensation and entertainment costs. The provision for income taxes for
2006 represented an effective tax rate of 36% which was

Page 21

greater
than the statutory rate primarily as a result of non-deductible stock
compensation expense and state income taxes partially offset by R&D and
other tax credits. The income tax benefit for 2007 represented an effective tax
rate of approximately 1% resulting primarily from R&D and other tax
credits.

Financial Condition,
Liquidity and Capital Resources

The
Company’s cash and cash equivalents were $1,083,000 at December 31, 2008
compared to $667,000 at December 31, 2007. Working capital increased $431,000 to
$10,819,000 at December 31, 2008 from $10,388,000 at December 31, 2007. The
Company’s current ratio increased slightly to 2.88 to 1 from 2.63 to
1.

Net cash
provided by operating activities for 2008 was $1,660,000 compared to cash used
of $3,178,000 for the prior year. The improvement was primarily due
to decreases in accounts receivable and inventories which were partially offset
by decreases in accounts payable and accrued expenses and the increase in an
other receivable related to the transfer of raw material inventories to one of
the Company’s primary vendors under a turn-key agreement initiated during the
fourth quarter of 2008.

Net cash
used by investing activities was $1,466,000 for 2008 compared to cash provided
of $1,124,000 for 2007. During September 2007, the Company realized proceeds of
$2,792,000 from the sale of its headquarters. The Company incurred
$1,413,000 of capital expenditures during 2008 compared to $1,188,000 for 2007.
Equipment purchases during 2008 were driven
by Fore-Sight cerebral oximeter demonstration equipment and clinical research
units, information technology, manufacturing equipment and furniture and
fixtures and leasehold improvements pertaining to the Company’s expansion of its
adjacent facilities. Cash used for investing activities in 2007 included
$1,188,000 for manufacturing equipment, leasehold improvements commensurate with
the expansion of the Company’s adjacent leased space, engineering equipment and
enhancements to the Company’s IT infrastructure. During 2008, the
Company incurred $184,000 of expenditures to purchase intangible assets
including $60,000 related to deferred finance charges and $70,000 pertaining to
patents and trademarks. Current year additions reflect an adjustment of a prior
year accrual of $131,000.

Net cash
provided by financing activities was $222,000 for 2008 compared to $1,387,000
for 2007. During May of 2008, the Company consummated a private placement of
333,333 shares of its common stock for an aggregate sum of $1,000,000. The
Company repaid $577,000 of long-term debt during 2008 and reduced its
line-of-credit balance by $255,000 at December 31, 2008. During 2007, the
Company received advances under the line-of-credit of $2,250,000 and repaid
$1,516,000 of long-term debt which included the retirement of its mortgage debt
of $929,000 upon the sale and leaseback of its headquarters.

The
Company currently leases four facilities and certain equipment under
non-cancelable operating leases. The following table sets forth a summary of the
Company’s cash commitments under contractual obligations as of December 31,
2008:

Contractual

One
Year

2 –
4

5 –
7

More
Than

Obligations

Total

or Less

Years

Years

Seven Years

Long-term
debt

$

2,322,560

$

614,067

$

1,708,493

$

—

$

—

Operating
leases

3,379,000

472,235

1,289,557

1,169,208

448,000

$

5,701,560

$

1,086,302

$

2,998,050

$

1,169,208

$

448,000

On
February 11, 2008, the Company amended and restated its existing line of credit
with NewAlliance Bank (the “Bank”). The Company entered into a new
Commercial Loan Agreement (the “Loan Agreement”) and related Commercial
Revolving Promissory Note (the “Note”) which provide for borrowings on a
revolving basis, at the Bank’s discretion, in an amount up to
$10,000,000. Loans in excess of $2,000,000 up to $10,000,000 can be
made only if the maximum principal amount outstanding does not exceed a
borrowing base equal to the sum of (i) 75% of eligible receivables (as defined
in the Loan Agreement) and (ii) the lesser of $2,500,000 or 30% of eligible
inventory (as defined in the Loan Agreement.) Borrowings under the
Loan Agreement and the Note are secured by a first priority lien in all the
business assets of the Company pursuant to a Security Agreement (the “Security
Agreement”). The Loan Agreement contains customary non-financial
covenants and financial covenants consisting of a debt service coverage ratio
and a debt to tangible net worth ratio.

Page 22

On
December 31, 2008, the Company amended the line of credit pursuant to a Debt
Modification Agreement (the “Modification Agreement”). The Modification
Agreement amended the Loan Agreement and related Note. The Modification
Agreement extends the maturity date of the Note to July 1, 2010 and also amends
the interest rate for the revolving loans under the Credit Agreement by
increasing the rate from (i) the Prime Rate (as defined in the Loan Agreement)
minus .50% to (ii) the Bank’s Base Rate (as defined in the Modification
Agreement) with a minimum interest rate of 3.25% per annum. The Modification
Agreement also amended the existing debt service coverage ratio covenant to
provide that it would be measured quarterly on a rolling four quarter basis
beginning December 31, 2008.

The
Company executed an amendment to the line of credit agreement on April 3, 2009
pursuant to a Second Modification Agreement with the Bank effective March 31,
2009. Under the terms of the Second Modification Agreement, the debt service
coverage ratio was revised from a quarterly test to an annual test for the
twelve months ended December 31, 2009 and the minimum ratio revised from 1.5 to
1.0. As of the first quarter of 2010 and thereafter, the ratio returns to 1.5
with testing resumed on a quarterly basis. The maximum availability under the
line of credit was reduced to $5,000,000 from $10,000,000. Further, the interest
rate was modified from the Bank’s Base Rate with a floor of 3.25% to the Bank’s
Base Rate plus 1.0% with a floor rate of 4.0%.

The
Company believes that its sources of funds consisting of cash and cash
equivalents, cash flow from operations and funds available from the revolving
credit facility will be sufficient to meet its current and expected short-term
requirements. However, future cash flows may be impacted by a number
of factors, including changing market conditions or failure to meet financial
covenants under our current or any future loan agreement. Changes in
payment terms to one or more major suppliers could also have a material adverse
effect on our results of operations and future liquidity. We believe
that our current levels of working capital and available debt financing are
insufficient to fund major growth initiatives, such as significant increases in
our sales and marketing personnel, or material acquisitions. Any major growth
initiatives would require us to seek other sources or forms of debt or equity
capital. There can be no assurance that we will be successful in securing such
funding for major initiatives. There can be no assurance that we will be
successful in obtaining a new credit agreement or that we would be successful in
securing additional sources or forms of capital for major
initiatives.

Off-Balance Sheet
Arrangements

The
Company has no off-balance sheet arrangements other than operating leases for
office and warehouse space.

Critical Accounting
Policies

The
Company’s financial statements have been prepared in accordance with generally
accepted accounting principles in the United States. In preparing the financial
statements, the Company is required to make estimation judgments. Such judgments
are based upon historical experience and certain assumptions that are believed
to be reasonable in the particular circumstances. Those judgments affect both
balance sheet and income statement accounts and disclosures. The Company
evaluates its assumptions on an ongoing basis by comparing actual results with
its estimates. Actual results may differ from the original estimates. The
following accounting policies are those that the Company believes to be most
critical to the preparation of its financial statements.

Inventory
Valuation–The Company’s inventories are stated at the lower of cost or
market. The Company provides allowances on inventories for any material that has
become obsolete or may become unsalable based on estimates of future demand and
the sale price in the market. Judgments with respect to salability and usage of
inventories, estimated market value, and recoverability upon sale are complex
and subjective. Such assumptions are reviewed periodically and
adjustments are made, as necessary, to reflect changed
conditions. There were no significant write-offs for any period
presented.

Deferred Income Tax
Assets–The Company has recorded deferred income tax assets for the
estimated benefit of future tax deductions on inventories, property and
equipment and other accruals and various tax credits. Based on the
Company’s projection of future taxable income and certain prudent tax planning
strategies, management believes its deferred income tax assets will be
realized. Should circumstances change and the Company determine that
some or all of the deferred income tax assets would not be realized, a valuation
allowance would be recorded resulting in a charge to operations in the period
the determination is made.

Page 23

Accrued Warranty
Costs–The Company warranties its products for up to three years and
records the estimated cost of such product warranties at the time the sale is
recorded. Estimated warranty costs are based upon actual past experience of
product returns and the related estimated cost of labor and material to make the
necessary repairs. Warranty costs have not been material to operating results
over the past several years. However, if actual future product return
rates or the actual costs of material and labor differ from the estimates,
adjustments to the accrued warranty liability would be made.

Recent Accounting
Pronouncements

Recent
accounting pronouncements potentially affecting the Company’s future financial
statements are described under the caption, “New accounting pronouncements” in
Note 2 – Summary of Significant Accounting Policies. There are no new
pronouncements which are likely to materially impact the Company’s financial
statements.

Item
7A. Quantitative and Qualitative Disclosures about Market
Risk

The
Company has certain exposures to market risk related to changes in interest
rates. The Company has an outstanding line-of-credit agreement, under
which there were borrowings of $1,994,000 at December 31, 2008. The
line-of-credit agreement, amended effective March 31, 2009, bears interest at
variable rates based on prime rate indices. The Company holds no derivative
securities for trading purposes and is not subject in any material respect to
currency or other commodity risk.

Item 8. Financial Statements and
Supplementary Data

Page

Report
of Independent Registered Public Accounting Firm

F-1

Financial
Statements

Consolidated
Balance Sheets as of December 31, 2008 and 2007

F-2

Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006

F-3

Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended December
31, 2008, 2007 and 2006

F-4

Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006

F-5

Notes
to Consolidated Financial Statements

F-6
to F-18

F-1

Report
of Independent Registered Public Accounting Firm

Shareholders
and Board of Directors

CAS
Medical Systems, Inc:

We have
audited the accompanying consolidated balance sheets of CAS Medical Systems,
Inc. (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, changes in shareholders’ equity, and cash
flows for each of the years in the three-year period ended December
31, 2008. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of the
Company’s internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2007, and the results of its operations and its cash flows for the
each of the years in the three-year period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United States of
America.

As
discussed in Note 2, the Company adopted FIN 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109, effective January 1,
2007.

CAS
Medical Systems, Inc. (“CASMED”) and its wholly-owned subsidiary, Statcorp, Inc.
(“Statcorp”) operate as one reportable business segment. Together, CASMED and
Statcorp (the “Company”) develop, manufacture and distribute diagnostic
equipment and medical products for use in the healthcare and medical industry.
These products are sold by the Company through its own sales force, via
distributors and manufacturers representatives under contract, and pursuant to
original equipment manufacturer (“OEM”) agreements both internationally and in
the United States. The Company’s operations and manufacturing facilities are
located in the United States. During 2008 and 2006, one customer accounted for
approximately 12% and 11%, respectively, of net sales. No customer accounted for
more than 10% of net sales during 2007. The Company
generated international sales of approximately $10.6 million in 2008,
$8.6 million in 2007, and $7.7 million in 2006. In the normal course
of business, the Company grants credit to customers and does not require
collateral. Credit losses are provided for in the period the related
sales are recognized based on experience and an evaluation of the likelihood of
collection. Credit losses have been within management’s
expectations.

(2)

SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

Use
of estimates

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of sales and expenses during
the reporting period. Estimates that are particularly sensitive to
change in the near-term are the inventory valuation allowances, capitalized
software development costs, allowance for doubtful accounts and warranty
accrual. Actual results could differ from those estimates.

Principles
of consolidation

The
consolidated financial statements include the accounts of CASMED and its
wholly-owned subsidiary. All intercompany accounts and transactions are
eliminated in consolidation.

Cash
and cash equivalents

The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. The Company has
deposits in a limited number of financial institutions with federally insured
limits. Cash (including cash equivalents) at these institutions is normally in
excess of the insured limits. However, the Company believes that the
institutions are financially sound and there is only nominal risk of
loss.

Inventories

Inventories
are stated at the lower of cost, determined by the first-in, first-out method,
or market.

Property
and equipment

Property
and equipment, including leasehold improvements, are stated at cost.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets, which range from two to five years for machinery and
equipment, and twenty years for building and improvements. Leasehold
improvements are amortized over the life of the improvement or the lease term,
whichever is shorter. Maintenance and repairs are charged to expense
when incurred.

F-7

The
Company has separately reported its FORE-SIGHT cerebral oximetry monitors
located at customer sites within the U.S. Such equipment is held
under a no cost program whereby customers purchase disposable sensors for use
with the Company’s equipment. The Company retains title to the
monitors shipped to its customers under this program. The monitors are
depreciated on a straight-line basis over five years to cost of
sales. As of December 31, 2008, the Company has capitalized
$1,132,422 of costs pertaining to the monitors which have a net book value of
$905,854.

Depreciation
and amortization expense on property and equipment was $1,026,870 in 2008,
$750,411 in 2007, and $455,755 in 2006.

Long-lived
assets

The
Company reviews its long-lived assets including goodwill for impairment at least
annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company believes that
the carrying amounts of its long-lived assets are fully recoverable.
Accordingly, no impairment loss has been reflected in the Company’s reported
results of operations for any year presented.